Brother Can You Spare 10 Grand?

Peter Schiff
Apr 14, 2008

The grainy footage of Great
Depression soup lines and Hoovervilles now in heavy rotation
on the major news outlets has been largely counterbalanced by
a parade of economists who reassure us that such a protracted
downturn is currently inconceivable. Their confidence stems primarily
from the belief that government safety nets enacted since the
New Deal, together with a Fed chairman who is a self-professed
depression buff, will prevent a replay of the 1930s. As usual,
this analysis is woefully optimistic and sidewalk pencil sales
may in fact be a growth industry.

Although Bernanke may have
spent much time studying the Great Depression, his understanding
of it is anything but sound. That epic slowdown resulted from
a series of policy mistakes, first by the Federal Reserve and
then by the Federal Government. Bernanke's view is that these
mistakes were simply not large enough. What the current Fed chairman
does not grasp is that the seeds of the Depression were sown
during the "roaring" 1920s when the Fed, in an effort
to support the British pound, kept interest rates much too low.
It was this unnaturally cheap money that fueled a raging stock
market bubble. In 1929, when the Fed finally came to its senses
and raised rates, the bubble finally popped. In his reading of
this history, Bernanke ignores the effects of the overly easy
policy and simply lays blame on the tightening.

As the recession progressed,
both Hoover and Roosevelt, in politically inspired efforts to
ease the pain, repeatedly interfered with free market forces
working to correct the imbalances. This ultimately turned what
would have been an ordinary, though perhaps severe recession,
into what we now call the Great Depression. This time around,
the Greenspan/Bernanke Fed blew up even bigger bubbles and both
the Fed and the Federal Government now show an even greater commitment
in preventing free market forces from rebalancing our economy.
As a result, similar to the way that the "War to End all
Wars" had to be rechristened after 1939, future historians
may need to come up with a new term for the Great Depression.

Rather than acting as safety
nets, the programs now being devised by government will act more
like snares, further impeding market forces from righting the
ship. But for those who insist that a new "New Deal"
is needed, it is important to retain a sense of scale. Prior
to the massive expansion of Federal programs in 1933, the government
was very small relative to the economy of that time. Though I
believe that many of the economic policies of the New Deal were
unwise and simply prolonged the Depression, at least back then
we could afford them. Today of course, the Federal Government
is already enormous, and any increase in spending will either
have to be financed by further borrowing from abroad or though
additional money printing by the Fed.

For his part, Bernanke blames
the Depression on the Fed not printing enough money. Had the
Fed done precisely what Bernanke now thinks they should have,
the Great Depression would have been much worse. Had the Fed
tried to re-inflate the stock market bubble or keep it from bursting
in the first place, it's the dollar that would have collapsed,
and Depression-era America would have looked liked Weimar Republic
Germany. As bad as the Great Depression was, hyperinflation would
have made it even worse.

The good news is that there
is still time to alter course and steer clear of both hyper-inflation
and depression. The bad news is that if we remain on our current
course that is precisely where we will end up. Our days of dominating
the global economy are clearly coming to an end. The only question
is will we follow the path of Great Britain or Argentina?

***

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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.

Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.